The Somewhat Overlooked Coal Bubble

Almost everyone is familiar with the tech and telecom bubbles of the late 1990s, but very few outside of the coal and finance industries are familiar with the coal bubble that peaked in early 2008.  Propelled by various factors as the weak dollar and ravenous Chinese consumption, the coal industry averaged ~43% annual returns from January 2000 through June of 2008 (data from Ken French’s site).  Stocks such as Cliffs Natural* and Arch Coal delivered insane returns to investors as you can see from this graphic (data from Morningstar):

Investors couldn’t be blamed for thinking their coal stocks could grow indefinitely.

However, as everyone knows, in September 2008 the Great Financial Crisis hit, and commodities plunged along with a surge in the dollar and a deep global recession.  Coal prices were more than halved:

From the trough in 2009 through early 2011, there was a mild recovery, but since then, the price of coal, – and the coal industry along with it, – has been in a steep decline.  The results are quite stunning.  Billions and billions of dollars in shareholder wealth were destroyed in one of the great but short-lived speculative bubbles on record (data from Ken French):

At its  peak in June 2008, a $10,000 investment in June 1926 would have been worth ~$46,000,000 for an average annual return of about 10.8%.  However, since that peak (through 2015), the coal industry has averaged losses of about 38%/yr.  Another way to look at that is that it took the coal industry about 82 years to reach its peak value, but it took only 7.5 years to lose about 97% of that peak value.

What’s curious is that one can see from the FRED graph above that the price of coal is down only to about where it was in 2007, but the industry has lost 92% of its value from just its January 2007 values.  Companies like Arch Coal have gone bankrupt while Cleveland Cliffs trades for a fraction of its peak value.  The 16 year chart of a portfolio of the two companies looks to be one of the greatest double tops in  history (from Morningstar):

So, exactly what happened to the coal industry?

For one, demand for coal has seemed to slow down substantially.  For example, the Energy Information Administration (EIA) estimates that US power plants are consuming 29% less coal for power generation today than they were in the peak days of 2007 as power providers have transitioned to cheaper and more environmentally friendly natural gas.  In China, the once great consumer of all commodities, demand has fallen off as well.

But other industries such as oil have survived more or less intact without suffering the same catastrophic losses as coal.  What seems to be the case is that politics have played a part in the coal industry’s demise; the Obama administration has made no secret of its animosity toward the coal industry, and the President’s possible successor, Hillary Clinton, has expressed her desire (later apologized for) to “put a lot of coal miners and coal companies out of business.”  Politics aside, it’s easy to see why coal investors would sell first and ask questions later.

So, the future of the coal industry is unclear.  Some have called for a bounce (see Meb Faber’s posts here and, more recently, here).  However, even if the coal industry survives its political enemies and coal stocks are due for a rebound, it’s highly doubtful that we’ll see anything like a recovery to the bubble days of 2007-2008.

*Yes, Cliffs Natural is primarily an iron ore company, but it also operates several coal mines in North America.